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Loan Consolidation - Pros & Cons

Find out if consolidating your loans is right for you by learning about the advantages and disadvantages of consolidation. Also, consider all the possibilities before you act. Once you consolidate you are locked into a loan with a fixed interest rate. If you just want to reduce your monthly payment, it could be wise to consult with your lender about other possibilities before consolidating.

Pros and Cons of Loan Consolidation

Fixed Interest Rate
If consolidating variable interest rate loans, you save money if you consolidate while variable interest rates are low.Variable interest rates change annually. Therefore, if you consolidate your variable interest rate loans and the interest rates drop the following year, you have "locked" into the higher interest rate for the life of the loan.

Single Payment

If you have loans with multiple lenders/holders, you send a monthly payment to each. However, if you consolidate all those loans, you make a single payment.

Lower Monthly Payment

Consolidation loan monthly payments are lower because the repayment period is longer.

Loss of Deferment and Forgiveness Benefits

You may not be eligible to receive the same deferments on your Consolidation Loan than what you were eligible to receive on your original loans. Also, you might lose eligibility for certain cancellation or forgiveness programs, especially if you are including Perkins Loans in the Consolidation. (In either case, check with your lender) .

More Interest Paid

With a longer repayment period you end up paying more interest over the life of the loan.
What Else?

Manage Monthly Budget

Savings from reduced monthly payments allows you to pay other monthly bills with higher interest rates, such as credit cards, etc.

Remove Loans From Default Status

After making satisfactory repayment arrangements with the holder of your loans in default, you can consolidate those loans and reinstate benefits (deferments, eligibility to apply for financial aid, etc.) that were lost when your loans were placed in default.

No Extra Costs

There are no application or processing fees and there are no prepayment penalties.

Loss of Payment Incentives

You may forfeit any payment incentives/discounts you are currently receiving (check with your lender).